We had come out with an I-direct Instinct on Oriental Hotels in March, 2017. We reiterate that our upside thesis was based on a cyclical upturn in the hotel industry and rise in spending by domestic travellers. Moreover, we note that despite the recent run-up, the company is available at attractive valuations of Rs 1.2 crore/room (below industry average of Rs 2.5-3.0 crore/room).

Triggers

Hotel industry on verge of turnaround

The hotel industry has seen some green shoots mainly led by a decline in room supply & increase in demand. Proposed supply of rooms has significantly reduced from 1,14,446 in FY08 to 47,067 in FY17 (source: HVS). This is further validated by the fact that demand growth (6.2% YoY) outpaced supply growth (3.1% YoY) in FY17. Overall occupancy has also improved 3% YoY to 64% while the average room rate (ARR) improved 1.7% YoY in FY17. Further, in the next three to four years we expect the sector to see a better growth trajectory mainly led by rise in spending by domestic travellers & improved tourism measures by the government.

Set to witness margin expansion

Oriental Hotel has 1060 rooms and a major presence in the south. It is expected to be a key beneficiary of a demand revival. Further, re-branding of Gateway and Vivanta brands to Taj brand are expected to lead to an improvement in ARR. The company has maintained average EBITDA margin of over 14% in FY13-17. In good market condition, it has the potential to go above 35% (as seen in FY08). Assuming 75% occupancy and EBITDA margin of 30% in FY20E, the company may post EBITDA of | 145 crore (i.e. 44% CAGR in next three years). In addition, the company could register PAT of | 70 crore (implying a P/E of 14.0x) in FY20E.

Valuation & Outlook

We believe that an improvement in occupancy and margins would result in healthy cashflow generation. This could be used to pare down debt or increase dividend payout or for expansion. Further, strong promoter background (Tata group holding 33.6% stake) would provide a huge advantage in terms of operations and expansion. In addition, the stock is trading at an EV/room of Rs 1.2 crore/room (below industry average of Rs 2.5-3.0 crore/room). Given this, we revise our target price of Rs 85- 90/share (i.e. EV/room of Rs 1.7-1.8 crore/room).